July 2nd, 2010

Reinsurance Renewal July 1, 2010: Capital Cushion Continues to Impact Pricing, Part II: Latin America and Caribbean, Retrocession

Posted at 1:00 AM ET

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Chris Klein, Director of Reinsurance Markets
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Latin America and Caribbean

In the Latin America and Caribbean region excluding Chile, terms and conditions in the property excess of loss and pro rata lines were unchanged at the July 1 renewal.

Readily available capacity combined with new market entrants continued to put downward pressure on rates. The Chilean earthquake losses, however, had somewhat of a mitigating effect on this pressure on rates and on terms.

We saw rates increase in Chile for treaty excess of loss and facultative risks in the range of 50 percent to 70 percent. Reinsurers have been attempting to acknowledge recent increases in Chilean earthquake provisions from Munich Re and Swiss Re, but most have built their own loss estimates around a sensible market loss range. Specific factors relating to individual primary insurers will ultimately determine pricing. These determinants include: loss experience; transparency in reporting the earthquake loss and to what extent their losses have been inspected and adjusted; face to face approach with reinsurers; size of their programs and their portfolio.

There were likely a number of corrections on the proportional side (where cedents encountered the greatest resistance from reinsurers):

  • Contracts with more strict co-insurance clauses, limiting the share each insurer can take of a shared risk
  • Lower event limits
  • Reduced ceding commissions for earthquake
  • Minimum earthquake rates, and more reinsurer involvement in original policy terms e.g. deductibles.

It appears that the Chilean earthquake has finally enlightened reinsurers to the fact that Chile is a very seismically active country, which requires a different (more serious) approach to natural perils than other countries in the region.

Property Retrocession

The July 1 renewals for catastrophe retrocession transactions have a smaller deal flow than those earlier in the year, but are an important indicator, occurring at the start of the Hurricane Season. However, we did see inquiries in the London and Bermuda marketplaces and several placements reached completion, characterized by modest reductions in prices. Many markets were approaching full for US wind capacity, but there was still some capacity available. Whatever view was taken of pricing seen at the Florida June 1 renewals, it did not appear to divert any significant capacity to retrocession. Terms and conditions remained fairly stable from those seen in the early part of the year.

Investors in hedge funds with more insurance-linked securities (ILS) orientations that also write traditional covers seemed to have had concerns. The concerns reflected the various forecasts reports for a hurricane season with above average activity. They may have been sitting on capacity that they had available. Whether this was a prudent attempt to avoid what may have been seen as an increasing risk, or perhaps “keeping the powder dry” for a post event rationale for raising rates, remains to be seen.

One area where we saw interest among active buyers and sellers was for covers excluding the United For accounts with losses from the Chilean earthquake, prices increased in line with expectations. Buyers also showed an interest in buying down their retentions to protect against more attritional-type losses which might have damaged their results but not to a level that would have impacted prices.

Many reinsurers, including those based in Bermuda, were active in placing inquiries this year. We believe that this level of interest may have been caused by concerns about the potential capital impact of some of the large loss events in the first half of the year. Reinsurance as a capital solution is still perceived to be attractive. Index products, such as Guy Carpenter’s CWIL, received much interest in the London market, but there were also opportunities for placement of traditional business at acceptable terms.

Industry Loss Warranties

Loss events in Chile, Australia and the Gulf of Mexico have impacted (re)insurers’ appetites to retain loss. Buyers began looking to the industry loss warranties market in April and May to enhance those reinsurance protections already in place, resulting in an increase in traded volumes and terms hardening following a period of sustained softening that began in early 2009.

Compounded by forecasts of an active hurricane season, available capacity has contracted quickly in the last days and weeks. We are witnessing something of a crunch for U.S. nationwide wind with pricing increasing sharply as a result.

Click here to read Reinsurance Renewal July 1, 2010:  Capital Cushion Continues to Impact Pricing, Part I: Introduction  and US Property »

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Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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